Differences in the performance of the biggest defined contribution default fund mean some members could miss out on more than £500,000 of retirement income, warns JLT Employee Benefits.
Research from the consultant revealed that returns in the top ten funds over the last three years have varied from 3.5% to 9.5% a year.
If these figures were repeated over a working life, JLT said a typical saver in the worst performing fund would end up with a £185,000 pot while someone in the best default arrangements would have around £715,000.
The research also identified significant differences in the level of volatility between the ten funds, with the numbers ranging from 5.3% to 11.3%.
JLT head of defined contribution investment consulting Maria Nazarova-Doyle (pictured) said losing out on 6% of return each year could have a "huge, irreversible repercussion" on members' financial position at retirement.
She said: "While there may be a very good reason why a certain provider/default strategy is selected, it is paramount that this decision is reviewed regularly in light of the default's risk-adjusted performance, as well as changes in regulations, scheme demographics and wider investment universe."
The research looked at the impact of the different returns on a worker in their 30s paying 8% of a £30,000 salary into their pension with £10,000 already accrued.
Nazarova-Doyle said the study highlighted the fact that investment returns outweighed charges when it came to eating into potential retirement income.
She said: "Considerations of whether fees should be capped at 0.75% or 0.50% pale into insignificance when faced with such a huge difference in performance between providers.
In our previous example, had the fees been capped at 0.50% for the same strategies, the difference of 0.25% a year would only equate to approximately £35,000 overall, which does not even begin to compare with the difference that is driven by potential returns. Therefore, the focus should be not on fees but on the investment quality of default strategies."
JLT director Mark Pemberthy said the research was a powerful reminder that investment returns were a vital factor in delivering good DC outcomes.
He said: "Investment capability is a significant differentiator between pension schemes therefore our findings emphasise the importance of selecting a pension scheme provider based on overall value for money and not just cost or convenience, and having a robust governance framework to identify any changes in expected performance."
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